Passive Hedge Funds

42 Pages Posted: 12 Aug 2015 Last revised: 15 Jul 2016

Mikhail Tupitsyn

Monash Business School

Paul Lajbcygier

Monash University - Department of Banking & Finance

Date Written: August 10, 2015

Abstract

We show that most hedge fund managers are passive, not active. Active management should be manifest through nonlinear exposure to the systematic risk factors that drive hedge fund returns. In order to demonstrate managerial skill enhanced performance should accrue as a consequence of active management. Using generalized additive models we find that approximately two-thirds of hedge funds exhibit only linear factor exposures and hence are “passive”. What’s more such “passive” managers tend to outperform “active” managers. Finally, we also show that many “active” managers, despite initial nonlinear risk exposures, eventually become “passive”.

Keywords: Hedge Funds, Generalized Additive Models, Passive

Suggested Citation

Tupitsyn, Mikhail and Lajbcygier, Paul, Passive Hedge Funds (August 10, 2015). Available at SSRN: https://ssrn.com/abstract=2642057 or http://dx.doi.org/10.2139/ssrn.2642057

Mikhail Tupitsyn

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Paul Lajbcygier (Contact Author)

Monash University - Department of Banking & Finance ( email )

Wellington Road
Victoria, Roodepoort 3145
Australia

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